Opinion: S&P 500 will be 10% higher in six months, market-timing guru says

CHAPEL HILL, N.C. (MarketWatch) — This incredible bull market, which has earned the right to go sideways for a while, is instead going to keep powering ahead.

That, at least, is the forecast of the market timer who has more successfully called stocks’ direction in recent years than anyone I can think of. His latest forecast: The S&P 500
SPX, -0.20%
will rise to 2,225 in six months, 10.3% higher than where it stands today.

I’m referring to Sam Eisenstadt, the former research director at Value Line Inc. Though he retired in 2009 after 63 years at that firm, he continues in retirement to update and refine a complex econometric model that generates six-month forecasts for the benchmark stock market index.

As Eisenstadt would be the first to emphasize, his model isn’t perfect. For example, he conceded in an email earlier this week that he “failed to call the early October decline.” But it should also be noted that, unlike others who panicked, he chose to remain bullish — and is now enjoying the last laugh.

Though Eisenstadt’s model is proprietary, he says it’s constructed of indicators that his seven decades of research have shown to be significantly correlated with the market’s level six months into the future. He then uses complex statistical techniques to synthesize those individual indicators into a comprehensive model.

Eisenstadt’s model has an impressive track record. He reports an R-squared of 0.36 for his model’s forecasts since the early 1950s, which means that it has been able to explain 36% of the variation in six-month changes in the S&P 500.

Keep this statistic in mind as you decide what weight to place on the model’s latest forecast. Those of you who view the glass as half empty will note that the model is unableto explain 64% of the variation in six-month S&P 500 changes.

Nevertheless, being able to explain 36% of the variations is far better than being able to explain nothing. And, unfortunately, most of the indicators that investors and Wall Street pay lots of attention to are, from a strict statistical point of view, worthless.

Take your pick.

Eisenstadt concedes that his model’s bullishness may seem counterintuitive, given all the potentially currently bearish factors such as “Ebola and international political disturbances.” But correct forecasts almost always are met with incredulity; after all, if everyone believed the market would be 10.3% higher in six months, the S&P 500 would already be trading at Eisenstadt’s 2,225 target.

Eisenstadt’s advice is to ignore hunches, intuition and emotions, and instead to “stick to your numbers and let nature run its course.”

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.